ESG investing in Japan

In my last post, we illustrated corporate governance reform initiatives such as an introduction of the Corporate Governance Code that Japan had implemented in 2014. We also explained our perspective on sustainability issues that Japanese companies need to address. In this post, we present an instance of ESG investing in Japan.

The Government Pension Investment Fund (hereafter – GPIF) is a leading ESG investor in Japanese markets. GPIF is one of the largest asset owners globally and holds a total asset of JPY 163 trillion as of December 2017. Among its total assets under management, 26%, i.e. JPY 42 trillion, are its domestic equities which represent around 6% of the total domestic equity market. Therefore, GPIF is influential and can lead the market.

In fact, GPIF has been proactive in recent years. In May 2014, GPIF signed up to the Japan’s Stewardship Code, in September 2015 to Principles for Responsible Investment. It also joined the 30% Club and the Thirty Percent Coalition in November 2016. GPIF sees itself as a “Universal Owner” (a large asset owner who, as a consequence of its size, owns a slice of the whole economy and market through its portfolios), hence, the fund has a rationale to be proactive in ESG investment, by which the fund tries to minimise costs that can be caused by externalities of corporate activities.

GPIF initiatives are having a large impact. Japan has witnessed an exceptional growth in SRI assets (albeit from a low base) in recent years as the statistics below show. If we consider SRI assets as a proxy of ESG investment, ESG investment in Japan has seen a growth rate of 724% per annum while the global growth rate is 11.9%.

While we do not have the statistics updated for up to the end of 2017, we expect that the trend is continuing. In July 2017, GPIF selected three ESG indices, namely: the FTSE Blossom Japan Index, the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index. JPY 1 trillion of GPIF’s passive equities portfolio has been shifted to these three indices. JPY 1 trillion is a small part of GPIF’s passive equities portfolio given that 90% of its equities are held in a passive strategy method.